MOODY'S: We Might Downgrade Penn State Over This Abuse Crisis

Moody’s Rating Agency just put Penn State on downgrade review because of the abuse crisis.That’s the newest twist in the scandal that has engulfed State College, PA.

It currently has an Aa1 rating, but Moody’s argues that it faces “reputational and financial risk” in the coming months.

In specific, “potential lawsuits/settlements, weaker student demand, declines in philanthropic support, changes in state relationship and significant management or governance changes” could harm its standing.

NEAR AND LONGER-TERM CREDIT RISKS WILL BE ASSESSED FOR UNIVERSITY WITH APPROXIMATELY $1 BILLION OF RATED DEBT
New York, November 11, 2011 — Moody’s Investors Service has placed the Aa1 revenue bond rating of Pennsylvania State University (Penn State) on review for possible downgrade to assess credit risks emanating from the announcement this week by the Pennsylvania Attorney General of the filing of criminal charges involving child sexual abuse against a former assistant football coach, as well as perjury and failure to report charges against two senior university officials, including the CFO of the university. The university board has also dismissed Penn State’s president and head football coach.

Over the next several months, Moody’s will evaluate the potential scope of reputational and financial risk arising from these events. While the full impact of these increased risks will only unfold over a period of years, we will also assess the degree of near and medium term risks to determine whether to downgrade the current Aa1 rating. We will monitor possible emerging risks emanating from potential lawsuits/settlements, weaker student demand, declines in philanthropic support, changes in state relationship and significant management or governance changes.

Penn State is currently rated Aa1, reflecting its very strong student demand and other credit strengths linked to its status as Pennsylvania’s flagship and land grant university. Penn State has developed a strong national academic brand identity that has improved substantially over the past several decades. It has demonstrated consistent ability to draw out-of-state students who pay high tuition rates, which mitigates exposure to the declining number of high school graduates in its home state. In addition to its flagship campus in State College, it operates regional campuses throughout Pennsylvania. The university is a major research enterprise as well, with $725 million of research expenditures reported for fiscal year (FY) 2011. It also operates a major hospital which generates good operating margins. The University is one of the largest in the U.S., with enrollment of over 80,000 full-time equivalent students and total operating revenues of $4.6 billion for FY 2011. FY 2011 financial resources totaled $3.9 billion, most of which are liquid, unrestricted investments. For more information, please see Moody’s last published report for Pennsylvania State University dated April 28, 2010.

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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